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exam 7 > Friedland > Flashcards

Friedland Flashcards

1
Q

definition of Reserves

A

an amount booked in a financial statement, which may differ from actuary’s estimate of unpaid losses

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2
Q

Why is appropriate estimate of unpaid losses and reserves essential for Internal Management, Investor, Insurance Regulator, Rating Agencies

A

Internal Management requires sound reserves because they affect virtually every area of a reinsurer’s operations (pricing, uw, strategic planning, financial decision making)

Investor - appropriate reserves are essential to the evaluation of a company’s financial health

Insurance Regulators - rely on financial statements of reinsurers to carry out their supervisory role

Rating agencies evaluate movement over time in reinsurer’s reserves

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3
Q

definition of Reinsurance

A

a form of insurance in which the reinsurer, in consideration of a premium, agrees to indemnify the reinsured for part or all of the loss that the reinsured may sustain

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4
Q

Retrocession is

A

a reinsurer can transfer risks it has reinsured to another reinsurer through a retrocession

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5
Q

Working Layer

A

dollar range in which the (re)insurer expects relatively predictable loss experience with a fairly high level of loss frequency. It’s determined subjectively

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6
Q

Bordereau (Bordereuax)

A

Furnished periodically by the reinsured, a detailed report of insurance premiums or losses affected by reinsurance

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7
Q

Counterparty Default Risk

A

the risk that reinsurer is unable to meet its contractual obligations

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8
Q

Functions of Reinsurance

A
  • Promote Stability
    results can be stabilized by limiting a ceding company’s losses following a single event or the accumulation of losses arising from multiple events
  • Increase Capacity
  • Protect against catastrophe
  • manage capital and solvency margin
  • access technical expertise
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9
Q

General purpose of reinsurance

A

reduce the financial cost to insurance companies arising from the potential occurrence of specified insurance claims

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10
Q

Five primary reasons that ceding purchase reinsurance

A

Promote Stability
Increase Capacity
Protect against Catastrophe
Manage capital and solvency margin
Access technical expertise from reinsurers

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11
Q

Define Treaty reinsurance

A

Treaty reinsurance - ceding company enters into a contractual agreement with one or more reinsurers to cede all business arising from certain LOB as specified in the contract
cons - higher underwriting risk for reinsurer since policies uw by the cedent

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12
Q

Define Fac reinsurance

A

Fac Reinsurance - Fac cession is not automatic..
Both ceding and Re can agree/reject.
Certs used often - record of reinsurance coverage pending replacement by a formal reinsurance contract
Primary purpose is to increase cedent’s capacity

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13
Q

IRMI’s 2 hybrid reinsurance arrangements

A

Facultative Automatic - hybrid between fac and treaty. A bordereau of risks ceded is submitted. Thus rights to decline individual risk exist but is limited

Fac Obligatory Treaty - hybrid reinsurance that is a treaty under which the primary insurer has the option to cede or not cede. Re must accept any risks that are ceded

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14
Q

Proportional reinsurance (Pro Rata Reinsurance and Participating Reinsurance) is

A

both premium and losses are shared between ceding and Re based on cession percentage

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15
Q

What’s proportional reinsurance typically used for?

A
  • to manage capital and solvency margins
  • to increase capacity
  • to protect against catastrophes
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16
Q

Quota Share Reinsurance

A

the ceding company cedes to the Re an agreed percentage of each risk it insures

Typically on a treaty basis

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17
Q

Variable quota share reinsurance

A

Special QS that cession % varies based on explicit risk characteristics

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18
Q

Surplus Share Reinsurance

A

Re only reinsures losses that exceed the “surplus” amount after cedant’s retention. Typically as a multiple of ceding company’s retained line

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19
Q

Surplus Share Reinsurance Formula

A
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20
Q

Surplus Share Reinsurance Example

A
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21
Q

Excess Per Risk Reinsurance

A

EXL reinsurance that indemnifies excess loss with respect to each risk (one/a group of buildings)

Typically less exposed than Excess per Occurrence and Cat Reinsurance

Excess per risk is primarily used in property exposure, although can be used for casualty lines as well

22
Q

XOL reinsurance typically used for

A

to protect property exposures and increase capacity

often XOL reinsurance includes ceding commission but much less than proportional

actually, cat cover is just a special case of per occ XOL

23
Q

Excess per Occurrence Reinsurance

A

protects insurer from an accumulation of losses due to a single occurrence or event

24
Q

Catastrophe reinsurance

A

cat cover. Really just a special case of Per Occ XOL. Protects insurer from an accumulation of losses from a single or a series of cat event

25
Q

Reinstatement

A

frequently used in cat cover
restoration of the policy limit of a full limit loss.

Reinstatement premium may be considered earned immediately and can distort historical relationships

26
Q

Inuring

A

1st “inures” to 2nd

27
Q

Aggregate EXL Reinsurance (Agg Stop Loss)

A

XOL reinsurance that guarantees the ceding company their aggregate payable will not exceed a predetermined threshold

typically very expensive

28
Q

Clash

A

Clash reinsurance - attaches above all other policy limits. what’s the difference between clash and umbrella??????

29
Q

Finite Risk Reinsurance (NOT Deposit Accounting)

A

a form of reinsurance that specifically incorporates time value of money. Usually multi-year contract

30
Q

Loss Portfolio Transfers

A

A financial reinsurance transaction that loss obligations are already incurred and will ultimately be paid are ceded to a reinsurer. The time value of money will be considered in determining premium

31
Q

Adverse development cover

A

Mainly used in M&A.

32
Q

Loss Occurring vs Risk-Attaching

A

Loss-Occurring [all about loss occurred date]: pays all claims occurred between contract initiation to expiration regardless of when the ceding company issued the underlying policy

Risk-Attaching [about underlying policies uw date]: provide reinsurance coverage only for those policies that incepted during the reinsurance contract effective period. —> takes longer for contract to mature

33
Q

Subscription Percentage

A

Subscription policy is a reinsurance policy in which multiple reinsurers share the risk associated with providing the reinsurance coverage

mainly protects ceding company from credit risk

34
Q

Commutation Clause

A

[diff from Novation]
commutation = cancellation of policy considering time value of money
novation = complete discharge of responsibilities

35
Q

Why cedents may want to commute a reinsurance

A
  • to exit a line or geographic region
  • to manage reserves for transfer or sale
  • to avoid the credit risk associated with its reinsurer, especially if the reinsurer has experienced a credit downgrade
  • to better manage claims and claim-related expenses
36
Q

Why reinsurer may want to terminate

A
  • to end a business relationship
  • to protect itself from the potential insolvency of the cedent
  • to resolve the difference in reserve setup
37
Q

Definition for Sufficient Data

A

they include the information needed for the work

38
Q

Why Data Validation is more important for reinsurance actuaries ( important)

A
  • for each cedent and broker, IT system use different types of data and use different terms for similar types of data
  • Bordereaux reporting may be different by cedent/broker in the types of data reported, data labels, and frequency of submission to the reinsurer
  • Reporting lags due to : gaps in reporting critical claims info from cedent; issue related to data coding for reinsurer; unique nature of reinsurance that may lead to different coverage for similar loss events with different cedents
39
Q

Why reporting lags exist

A
  • claims must first be reported to cedent before reported to reinsurer (natural delay)
  • the long-tailed nature of certain types of reinsurance
  • use of bordereaux reporting makes claims being reported on a quarterly or more infrequent basis
40
Q

Define Homogenous Risk Groups (HRGs)

A

Risks that are managed together and have similar underwriting characteristics such as underwriting policies, claims settlement patterns, product features etc

41
Q

AY Aggregation for estimating unpaid losses pros & cons

A
  • easy to achieve
  • easy to understand
  • become reliably estimated sooner than underwriting year data since AY data represents losses occurring over a shorter time frame
  • Industry benchmarks,
42
Q

Dealing with large losses?

A
  • exclude from the initial ultimate loss projection
  • add back case-specific projection (typically rely on claims info/cat model)
43
Q

Recoveries

A
  • if after recovery, the loss still above retention, then the $ of recovery has no impact on cedent’s book
  • if after recovery, the loss below retention, the reinsurer gets returned payments and cedent’s payment take down too
44
Q

Common external sources of data

A

Reinsurance Association of America
Best’s Aggregate & Averages
Internet Searches

45
Q

Selecting ATA factors

A
  • Smooth progression of individual ATA factors and average factors across development periods [smooth decrease link ratios no jump around]
  • Stability of ATA factors for the same development period [no crapping all around]
  • Credibility for the experience [ consider benchmark when data has low cred]
  • Changes in patterns and applicability of the historical experience [consider change in book of business]
46
Q

How to handle different currencies

A
  • particularly needed for currencies
  • use a single date for the entire historical experience
47
Q

For a similar type of business, primary and reinsurance both shows what pattern in paid and incurred development

A
  • Greater volatility in the earlier maturity years in paid than incurred
  • Greater volatility in ATA for reinsurance than for primary; thus leading to greater volatility in ultimates projections
48
Q

The reporting and payment pattern of reinsurance vs primary

A
  • reinsurance payment and reporting pattern is longer than primary
49
Q

Proportional and non-proportional reinsurance for the same line of business (both treaty and fac) shows what patterns

A
  • Greater volatility in XOL than in proportional
  • CDFs are greater for XOL than for proportional
  • Greater volatility in paid:reported ratios
  • Greater volatility in ultimate losses too
50
Q

Property Reinsurance excl. Cat vs Prop Reinsurance Cat only triangle comparison shows

A
  • Loss pattern for cat can be distorted by timing of the events
  • set reserves for large cat events separately based on ground-up exposure assessment ( or cat models)
  • greater volatility for prop w/ cat
51
Q

How to combined loss experiences together under difference currencies

A

use the most recent spot rate for all cells in the triangle

exam 7 (20 decks)

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